- 01A $15,000 cosmetic budget turned into $41,000 when knob-and-tube wiring, corroded plumbing, and a cracked foundation showed up on demo day
- 02Three inspections on every fixer-upper: general home inspection, sewer scope, and foundation specialist — $700-$1,000 total, the cheapest insurance you'll buy
- 03Always get three contractor bids and use the middle number for your pro forma — the spread between low and high runs 40-60%
- 04The 75% rule: max purchase price = ARV x 75% minus rehab costs — that 25% margin absorbs holding costs, closing costs, and the surprises that always show up
Show Notes
Show Notes
I'm Martin Maxwell. A buddy bought a three-bedroom ranch in Memphis for $95,000. "Cosmetic work only" — paint, flooring, fixtures. Budget: $15,000. He called me two months later having spent $41,000 after uncovering knob-and-tube wiring, corroded galvanized plumbing, and an eight-foot foundation crack. The fixer-upper isn't the trap. Going in blind is.
"Cosmetic Only" — The Two Most Dangerous Words
A house priced 30% below market triggers fast math: buy for $95,000, put in $15,000, sell for $165,000. Clean spread. But the $15,000 assumes nothing's hiding. In a house that's been standing 40-50 years, something is always hiding — knob-and-tube wiring, galvanized or polybutylene plumbing, foundation settlement, termite damage, a roof with two years left, asbestos tile, mold behind the bathroom vanity. Any one of those turns a $15,000 cosmetic refresh into a $30,000-$45,000 structural rehab. You don't find out until demo day.
Three Inspections You Must Never Skip
Every fixer-upper gets three inspections. Non-negotiable.
General home inspection ($350-$500). Roof, HVAC, electrical panel, plumbing, structure, windows, appliances. It's a starting point — a good inspector flags where to dig deeper.
Sewer scope ($150-$250). A camera goes down the main sewer line. Old houses — anything pre-1970 — often have terracotta, clay, or cast iron lines. Tree roots invade them. They crack, they collapse. I had a $72,000 duplex in Cleveland where the general inspection came back clean, but the sewer scope found a collapsed terracotta line. Repair estimate: $8,500. I knocked the seller down $10,000.
Foundation specialist. Not your general inspector — a structural engineer. Your general guy spots a crack and says "might be a problem." The foundation specialist tells you whether it's cosmetic settlement or active structural failure. Foundation repairs run $4,000-$15,000 in Memphis, up to $20,000 in Dallas with its expansive clay soil. Know that number before you close.
Three inspections. $700-$1,000 total. On a $100,000 purchase, that's 1% of the deal.
Three Bids — Always
You found the issues. Now you need to know what they cost to fix. Get three contractor bids. The spread between low and high typically runs 40-60% — it's not that someone's ripping you off, contractors carry different overhead and get different supplier pricing. Use the middle number for your pro forma. Not the lowest — that's how you end up with a contractor who ghosts you in week three. Not the highest — that's how you blow the budget before drywall's up.
Don't pay more than 30% upfront. Ever.
The 75% Rule
Maximum purchase price = ARV x 75% minus rehab costs. ARV is the after-repair value — what the house will sell or appraise for after the work's done. Pull sold comps from the last 90 days, not listings or Zestimates.
Example: ARV of $165,000. Middle bid rehab costs of $22,000. Max offer: $165,000 x 0.75 = $123,750 minus $22,000 = $101,750. Not a penny more. That 25% margin absorbs holding costs, closing costs, financing fees, and surprises.
If the seller wants $115,000, the deal doesn't work. Walk.
Scope Creep: The Profit Killer
Scope creep happens when a $15,000 kitchen refresh turns into a $40,000 gut renovation because "while we're in there" you decide to move plumbing, add recessed lighting, and upgrade to quartz countertops. Every extra month of holding costs eats $800-$1,500 — especially on hard money at 11-13%.
Fight it with three things: a written scope of work before demo day (room by room, line by line), a $500 change order threshold with written approval before anyone picks up a hammer, and weekly job site walks. Scope creep happens when nobody's watching.
Resources Mentioned
- Fix-and-Flip Guide — the full framework from purchase to profit, including scope documents and payment schedules
- How to Find and Vet Contractors — screening, scope documents, and payment structures that protect your budget
- Fix-and-Flip Holding Costs — the complete breakdown of what every extra month actually costs you
- Due Diligence for Small Multifamily — the inspection checklist expanded for 2-4 unit properties
- ASHI Standard of Practice — the inspection standard referenced in this episode, covering what a qualified home inspector should examine
An FHA loan is a government-insured mortgage that lets qualified borrowers buy 1–4 unit properties with as little as 3.5% down — as long as they live in one unit as their primary residence for at least 12 months.
Read definition →A duplex is a building with two separate residential units — each with its own entrance, kitchen, and living space — often used for owner-occupancy or as a small rental investment.
Read definition →A revolving credit line secured by your property's equity. You draw when you need it and pay interest only on what you've borrowed—like a credit card backed by your home.
Read definition →Cash flow is what's left in your pocket after a rental pays all its expenses — including the mortgage. NOI minus debt service. What actually hits your bank account each month or year.
Read definition →Commercial real estate is income-producing property used for business purposes — office buildings, retail spaces, industrial warehouses, and multifamily (5+ units) — valued by NOI and cap rate, not comparable sales alone.
Read definition →
